Tuesday, February 28, 2006

Budget expert Stan Collender explains the following in his "Budget Battles" column (all text here is his, not mine):

The "starve the beast" theory of budgeting they have been using assumed that big deficits would pressure Congress to reduce spending.

It now looks as though the theory is really nothing more than a scary fiscal fairy tale.

If it were true, it would be happening now. The federal budget deficit could be close to or exceed $400 billion for several consecutive years and the five-year moving average deficit has never been higher than it is today.

But instead of making members of Congress consider spending changes, more representatives and senators of both political parties appear less willing to cut spending than ever before.

For example, many of the spending cuts in the Bush fiscal 2007 budget have already been rejected in one way or another. Some were literally dismissed out of hand when many of the most influential and powerful Republicans indicated they would not accept the president's proposals. Other Bush spending changes were rejected one or more times in previous years and have little or no chance of being enacted this year…

How did this happen?

As previous " Budget Battles " columns have pointed out, the beast has gotten so big that the spending cuts needed to reduce it are not politically palatable. The spending changes that are possible won't make enough of a difference for senators and representatives to support them.

The starve-the-beast strategists also seem to have not thought about the possibility that spending increases would be enacted at the same time as tax cuts. The Medicare prescription drug plan, activities in Iraq and Afghanistan, Katrina relief and homeland security together increased the deficit by more than $1 trillion over 10 years at the same time that a series of tax cuts were reducing revenues. Tax cuts alone might have left the deficit manageable; tax cuts plus spending increases did not.

At the same time this was happening, the White House was telling people that the deficit was not a problem so that any interest in moderating the policies that were feeding the beast were swatted away.

This makes the starve-the-beast strategy the latest example of a Washington myth, something that sounds plausible but turns out to be nothing more than fiction.

Friday, February 24, 2006

I’ve been looking forward for some time to reading Bruce Bartlett’s Impostor, and finally I’ve gotten my chance. It’s very much worth reading. Bruce powerfully makes the case that the current Bush Administration has absolutely nothing in common with principled small-government conservatism, is unique among modern U.S. Administrations in having no policy process, is leading us towards fiscal disaster, and that its budget policy cannot rationally be defended from a conservative viewpoint on “starve the beast” grounds.

As readers of this blog may have discerned, these are all views I share, although my philosophical orientation differs from Bruce’s (mainly in my having more of a taste for progressive redistribution and not as strong a prior as he does - albeit some - about market versus government solutions). But he powerfully makes his case, and I am unaware of any thoughtful or intelligent countervailing point of view on his claims, perhaps because none is possible. (Reciting slogans doesn’t count, even if you are Milton Friedman.)

One reason I consider Bruce’s point of view so important, beyond the politics of the current day, is that a solution to our fiscal problems is politically impossible without bipartisanship. Principled people on the right and the left actually agree about a lot, and could make a deal that both agreed was way better than policy today if they were empowered to do so. But national politics has to permit such an alignment, in the manner of the 1983 Reagan-Tip O’Neill agreement that helped sustain Social Security, or the 1986 tax reform. Bruce is one of the first people on the right to really grasp this, e.g., by calling for a VAT, on top of the current set of taxes, as better than just going on the way we’ve been. The Republican Party’s march to the extreme (albeit not small government conservative) right reflects a lot of political factors such as voter turnout patterns, gerrymandering, and the diminished number of battleground states, but it also reflects the ideological climate of partisan trickery uber alles. People like Bruce Bartlett and William Niskanen restore one’s faith in conservatives even if one has areas of persistent disagreement with them.

One of my favorite tidbits: at p. 32, we learn that Glenn Hubbard was “strongly chastised by Bush for telling him that a decision that he, Bush, had made was not good economic policy. Hubbard was told never to tell him that again.” If only Glenn Hubbard would speak frankly in public about this President and Administration, it would be great fun to hear.

Wednesday, February 22, 2006

While I doubt that it actually endangers our national security, it is certainly fitting that a White House that so often has demagogically misused security concerns for its own partisan ends is getting a bit of the same treatment this time. For them to complain would be a bit like Jack the Ripper saying that someone is being too rough.

I also suspect corruption or at least cronyism in this matter, albeit unrelated to the Dubai issue as such, given White House practices in Iraq and elsewhere along with the news reports suggesting that the contract was awarded to a company with prominent friends.

Tuesday, February 21, 2006

I gather from the Times that Larry Summers is about to resign as Harvard's President. Although he dug his own grave by making various impolitic and questionable statements, I regard this as an unfortunate turn of events. Admittedly judging him from a distance, Summers seemed to be someone who cared about academic standards and about taking teaching obligations seriously, and who, to some extent, ran into interest group opposition that ably took advantage of his blunders.

Sunday, February 19, 2006

For the sixth straight year, Shadow has won the Good Guy Award, Feline Category, for our household.

Ursula wins a Purple Heart for coming downstairs while two fifty-pound basset hounds were visiting. They immediately gave chase, baying loudly, but she scampered around the kitchen and back upstairs just in time.

Buddy wins - well, let's just call it the We Love Him Anyway Award. Very sweet-tempered, but with a young cat's taste for excitement.

Monday, February 13, 2006

The following statement by the Humane Society of the United States is available here:

"Monday's hunting trip to Pennsylvania by Vice President Dick Cheney in which he reportedly shot more than 70 stocked pheasants and an unknown number of mallard ducks at an exclusive private club places a spotlight on an increasingly popular and deplorable form of hunting, in which birds are pen-reared and released to be shot in large numbers by patrons. The ethics of these hunts are called into question by rank-and-file sportsmen, who hunt animals in their native habitat and do not shoot confined or pen-raised animals that cannot escape.

"The Pittsburgh Post-Gazette reported today that 500 farm-raised pheasants were released yesterday morning at the Rolling Rock Club in Ligonier Township for the benefit of Cheney's 10-person hunting party. The group killed at least 417 of the birds, illustrating the unsporting nature of canned hunts. The party also shot an unknown number of captive mallards in the afternoon.

"'This wasn't a hunting ground. It was an open-air abattoir, and the vice president should be ashamed to have patronized this operation and then slaughtered so many animals,' states Wayne Pacelle, a senior vice president of The Humane Society of the United States. 'If the Vice President and his friends wanted to sharpen their shooting skills, they could have shot skeet or clay, not resorted to the slaughter of more than 400 creatures planted right in front of them as animated targets.'"

Thursday, February 09, 2006

A group called the "Coalition for Tax Competition" has just sent a letter to OMB Director Bolton urging that the U.S. de-fund the Organization for Economic Cooperation and Development" (OECD), due to the latter's strong efforts in recent years to coordinate international responses to tax competition (and, I should add, tax evasion, which is different but can involve the same players).

With Grover Norquist and other anti-tax luminaries being the signatories, their sending this letter to the White House is presumably a formality, in the sense of being merely a PR stage in a coordinated campaign that involved White House participation from the start.

I'll give these guys one thing. The issues raised by tax competition are indeed two-sided. They claim that tax competition is good because it lowers overall tax levels and welfare state funding. Although some on the left (Reuven Avi-Yonah, for example) agree with this albeit seeing it as bad rather than good, I personally feel it's overstated in that the main tax base for all nations - resident individuals' earnings - is not at this point greatly affected. But there are market benefits to reducing the tax systems' cartel power. On the other hand, tax competition can actually be inefficient, since it may simply create tax preferences for mobile businesses that can exploit it and permit tax reduction via wasteful planning transactions. And without cartel power via taxation, it would be impossible to fund public goods. The correct analysis here lies at the margin, and I don't know how it would come out - it depends, for example, on various political imponderables regarding the response to the relatively minor revenue effect.

The signatories also claim that tax competition is good for the U.S. That, of course, depends. They may be right in cases where U.S. individuals who own interests in multinational entities (MNEs) pay less tax to foreign governments by reason of tax competition, and thus possibly more to the U.S. via reduced foreign tax credits. They may also be right in cases where the U.S. can compete successfully with foreign countries for tax base. (Although note that, these days, we have relatively high corporate tax rates.) But they are wrong, from a U.S. national welfare standpoint, in cases where either of these scenarios runs in the other direction - i.e., where we're talking about foreigners' tax payments to the U.S. that would be creditable, or other countries tax-competing with us for a share of the worldwide base.

One point they don't address: the OECD is accused at times, in its anti-tax competition initiatives, of favoring the interests of high-tax developed countries relative to low-tax less-developed countries. Insofar as this is true, the OECD might be serving U.S. interests (and those of our peers) but at the expense of poorer countries. This is certainly open to criticism from a global welfare standpoint.

The easy tiebreaker would be to say: If Grover Norquist is for it, I should be against it. Certainly an excellent rule of thumb, but ultimately too knee-jerk for my taste. This is a subject that could bear being debated more in tax policy circles.

Maybe it's just me, but looking casually at the New York Times I once again had the feeling of having stepped into an alternate universe, totally unimagined in the U.S. before the 2000 election.

First, on page 1, the headline: "Tough U.S. Steps in Hunger Strike at Camp in Cuba." The article explains: "Guards have begun strapping detainees into 'restraint chairs' to feed them through tubes and prevent them from vomiting." Keep in mind, of course, that many, perhaps most, of the detainees at Guantanamo have no connection to terrorism, and were picked up by chance or mistake because the U.S. troops overseas have been operating in places where they simply don't have the local knowledge to figure out who is who.

Inside the paper, news concerning Attorney General Gonzales' performance at Senate hearings concerning the secret wiretapping. He is asked how could the disclosure have hurt national security. Wouldn't you think al Qaeda terrorists already knew that the U.S. might be trying to monitor their communications?

Well, yes, Gonzales agreed. "But if they're not reminded about it all the time in newspapers and in stories, they sometimes forget."

So apparently the harm to national security had nothing to do with disclosing the program itself, but with reminding those zany, forgetful kooks out there that the U.S. is in fact trying to catch them. (Although frankly I wouldn't be too worried, if I were in their shoes - they're being chased by the guys who cornered bin Laden at Tora Bora and did such a great job with the Iraq reconstruction & insurgency, and in New Orleans.)

Gonzales then explained that the program had helped identify "would-be terrorists here in the United States."

For once, the often over-verbose Senator Biden was equal to the occasion.

"Have we arrested those people?" he asked. Gonzales replied evasively. In fact we know there were no arrests - these things are always announced, even when it harms national security, as in the notoriously premature White House leak concerning an arrest in Pakistan in fall 2004.

Finally Biden said: "Well, I hope we arrested them — if you identified them. I mean, it kind of worries me because you all talk about how you identify these people, and I've not heard anything about anybody being arrested."

Okay, so the terrorists the Administration found in the U.S. haven't been arrested yet. But I bet they're on double secret probation or something, at an absolute minimum.

Wednesday, February 08, 2006

Amazingly enough, a New York Times editorial had the best line, comparing it to James Frey's "A Million Little Pieces" (as in, an unacknowledged work of fiction). The budget is DOA anyway, and I think adults have better things to do than fussing about the idiotic details of the Bush "plans." As usual it has interesting statistical info of various kinds.

Having just eked out a victory in the House over reducing spending by $39.6 billion over 5 years (i.e., less than $8 billion per year), the Administration is now trotting out its supplemental budgetary request (i.e., outside the supposed Pentagon annual budget of $439.3 billion) of an extra $120 billion for Iraq and Afghanistan for one year.

Furman addresses what one might call the second-order fiscal problem in Social Security. The first-order problem is the program's existing fiscal gap, recently estimated at about $11 trillion. (And of course the broader U.S. fiscal gap, without which this would be less of a concern.) The second-order problem is that, even if we fixed the first-order problem based on our best estimates as of today, a problem of under- or over-funding would reemerge once there was new information about demographics, wage growth, etc. We can probably be confident that the political system will be unable to handle these changes in a timely fashion, for a range of reasons ranging from voters' loss aversion (relative to current law) to interest group politics to chicken games between Republicans and Democrats re. how to adjust the system.

Furman therefore proposes that changes be evaluated in terms of "robust solvency," i.e., how would their restoration of sustaiability survive changes to economic and demographic forecasts. Built-in features of the system reduce the risk exposure to changes, e.g., in GDP growth, but changes in the worker to dependent ratio, e.g., due to changes in fertility or mortality, are a different matter.

An example of a change that would not meet the robust solvency standard is changing from wage indexing to price indexing of benefits, for affluent seniors or all seniors. The problem with this change, from a robust solvency standpoint, is that, if economic growth is lower (increasing the Social Security funding program), the benefit cut it imposes is smaller (since wage indexing is then less in excess of price indexing), while, if economic growth is higher and benefits cuts are thus less needed, the benefit cut is higher. He therefore considers a shift to price indexing markedly inferior to an identical benefit cut, by an expected-value standard, that lacks this perverse and backwards feature.

As an implementation of robust solvency, Furman proposes dependency indexing, or having taxes and/or benefits adjust automatically to unexpected changes in the dependency ratio. This would make the system self-correcting without requiring the political system to show unexpected maturity in responding in a timely fashion. This idea could be combined with any Social Security reform that created sustainability under current median projections.

I consider this a very creative and worthwhile idea that merits serious consideration at a minimum and incorporation into various reform proposals on the high end.

Wednesday, February 01, 2006

I've certainly seen worse things come out of this Administration. E.g., the plan does address some genuine anomalies in existing law, such as the more favorable treatment of insured than uninsured routine coverage, and the difficulty of replicating the benefits of tax-free employer-provided plans if you don't have a large enough pool of employees to satisfy the insurance company's taste for diversified risk.

But of course it figures that once again, as always, the answer is more tax cuts. Also, although the short-term budget picture doesn't show the difference, HSAs that are permanently tax-free have a larger long-term budgetary cost than tax-free savings accounts that merely defer income.

One question I would ask myself before establishing an HSA, if I didn't expect to use it for a while, is how confident one should be, in the face of an enormous fiscal gap, that currently promised future tax benefits will actually be there when one is ready to use them.

A news report today says: "One day after President Bush vowed to reduce America's dependence on Middle East oil by cutting imports from there 75 percent by 2025, his energy secretary and national economic adviser said Wednesday that the president didn't mean it literally."

About Me

I am the Wayne Perry Professor of Taxation at New York University Law School. My research mainly emphasizes tax policy, government transfers, budgetary measures, social insurance, and entitlements reform. My most recent books are (1) Decoding the U.S. Corporate Tax (2009) and (2) Taxes, Spending, and the U.S. Government's March Toward Bankruptcy (2006). My other books include Do Deficits Matter? (1997), When Rules Change: An Economic and Political Analysis of Transition Relief and Retroactivity (2000), Making Sense of Social Security Reform (2000), Who Should Pay for Medicare? (2004), Taxes, Spending, and the U.S. Government's March Towards Bankruptcy (2006), Decoding the U.S. Corporate Tax (2009), and Fixing the U.S. International Tax Rules (forthcoming). I am also the author of a novel, Getting It. I am married with two children (boys aged 16 and 19) as well as four (!) cats. For my wife Pat's quilting blog, see Patwig’s Blog.